How to Get a Small-Business Loan

How do small-business loans work?

A small-business loan is similar to a traditional bank loan. The borrower makes monthly payments to the lender, who earns a profit by charging a predetermined interest rate on the total loan amount.

The loan terms spell out the stipulations of your agreement with the lender, including down payment and repayment terms, interest rates, monthly payments, and penalties should you default on the loan.

Small-business lenders

As a business owner in the trades, you can choose from multiple types of loan programs, and work with a wide range of lenders, from traditional lenders and financial institutions—including banks and credit unions—to online lenders. 

Some loans come with a guarantee from the U.S. Small Business Administration (SBA), meaning they’ll cover a percent of the funds if the borrower defaults on the loan payment. The SBA only sets guidelines and works with approved lenders to provide small-business loans. It’s important to note the SBA doesn’t administer any of the funding. Because they provide a government-backed guarantee, the SBA’s partner lenders are more likely to work with small businesses.

Will I qualify for a small-business loan?

For small-business owners, this is the million-dollar question. And to be honest, there’s no clear answer, as every lender handles the application process differently. Lenders will examine your financial statements and creditworthiness, and some may ask for a robust business plan, or require you to put up collateral or demonstrate proof of cash flow. 

In most instances, the lender examines:

• Financial statements, including tax returns, bank statements, and other bank account information

• Business assets, including property, real estate, and more

• Credit history, including credit reports and personal credit score

Types of small-business loans

Business owners have multiple financing options for choosing a small-business loan. The key to choosing the right loan depends on your company’s business needs. Are you preparing to launch a new startup company? Do you simply need some extra cash to support day-to-day operations? Or, maybe you’re planning to expand and grow your business. Knowing the answer to these questions makes it easier to choose the right loan for your service company.

Consider the following types of small-business loans:

• Business credit cards: Similar to a personal credit card, business credit cards provide immediate cash flow, often up to $500,000. These credit cards typically require a higher interest rate, but many offer a 0% introductory rate. Business credit cards provide a good solution for business owners who feel hesitant to take out a loan, were previously turned down by lenders, have bad credit, or lack cash flow to make a loan payment.

• Business line of credit (LOC): Unlike a traditional bank loan where you receive funds in a lump sum, a business line of credit essentially provides a pool of funds you can tap into as needed. Similar to a credit card, the lender sets the amount, and you incur monthly interest as soon as you withdraw money. You can use a LOC to pay an invoice, supplement payroll, purchase new equipment, and more.

• Short-term loans: These loans provide temporary financial support and, like the name says, usually need to be paid back within a year, but sometimes a matter of weeks or months. Short-term loans are easier to obtain than a line of credit, but they come with high annual percentage rates (APR) and costly late fees.

• SBA-guaranteed loans: The SBA sets guidelines and works with approved lenders to provide small-business bank loans. The agency doesn’t administer the funds, but instead guarantees a portion of the loan, which reduces risk for lenders. SBA-guaranteed loans offer favorable terms, but often take a few weeks to gain approval. The SBA may also require a business plan and some form of collateral, such as real estate.

• Paycheck protection program (PPP) loans: The federal government and the SBA launched the PPP loan program in March 2020 to help businesses that were hurt by the coronavirus pandemic obtain financing to continue their business operations and cover payroll costs. Depending on your business, they may no longer be available.

• Microloans: Ideal for small businesses and nonprofits, microloans provide funding up to $50,000, with the average loan totaling $13,000, according to the SBA. Interest rates vary, and lenders usually require some form of collateral and a personal guarantee of the business owner.

• Economic injury disaster loans (EIDL): With a maximum loan amount of $2 million, EIDL loans provide small businesses in a “declared disaster area” with financing to keep business operations running. Interest rates never exceed 4%, and the loan amount is based on your actual economic injury and your company's financial needs, according to the SBA.

• Working capital loans: As the name implies, working capital loans cover a small business’ short-term operational needs, not long-term investments. These loans are ideal for companies that experience seasonal spikes in their revenue. For example, a lawn care company may take out a working capital loan over the winter months to cover businesses expenses, and then pay down the debt during the busy summer months. Note: Working capital loans may be tied to your personal credit, so missed payments could hurt your credit score.

The small-business loan application process

After you choose the loan type and select a lender, you can start the loan application process. Fortunately, filling out the application is often the easiest part of the process. Depending on your lender, it may take anywhere from a day to several weeks to obtain the funds.

Some lenders will allow you to submit your loan application online, while others require you to fill out the application in person at the financial institution. Regardless of the lender, the key to a smooth loan application requires you to obtain all of the required documentation. Note: If you apply online, you may need to scan documents.

Also, make sure you fully understand the loan terms, including the interest rate, monthly payment, penalties, and other key details.

If you need assistance finding SBA-guaranteed loan options, fill out the SBA’s Lender Match form to receive a list of approved lenders within 48 hours.